Austerity still high on policy agenda
Fiscal adjustment should be a marathon, not a sprint, Christine Lagarde warns
IMF Managing Director Christine Lagarde and German Finance Minister Wolfgang Schauble played down reports of a dispute over austerity on Friday.
Lagarde denied she had switched from advocating spending cuts to less painful approaches.
Fiscal adjustment of the kind being applied in the eurozone must be seen as a marathon and not a sprint, Lagarde said after Schaubles comments on Thursday that she had contradicted the IMFs earlier pro-austerity stance.
We have said all along that adjustment is necessary but it is a matter of pace, Lagarde said in a debate on the sidelines of the annual IMF meeting in Tokyo. We have not changed our line at all.
Sticking firmly to the hard-line policies he has consistently advocated in dealing with high levels of government debt, Schauble repeated during the debate that there is no progress without pain and that there is no alternative to austerity.
You need a stable fiscal situation in order to ensure growth, said Schauble. There is no alternative to reducing too high spending in order to achieve this, he said, adding that politicians have to make hard decisions.
Schauble argued repeatedly that increasing public debt does not increase growth, but others taking part in the hour and a half-long debate suggested that the situation was not as gloomy as the German minister insisted.
Medium-term [fiscal debt] consolidation makes sense, said Citigroup Global Banking vice chairman Peter Orszag. But it should be accompanied by short-term stimulus, he argued, citing the case of New Zealand, which he said had applied such dual approaches successfully.
Raghuram Rajan, chief economic advisor to Indias finance ministry and a former IMF chief economist urged the adoption of a middle way between austerity and stimulus. Tell people that they have to run only half a marathon in order to avoid the kind of special protests now being seen in some eurozone countries, he said.
Europe must confront the fact that some of its debt is unsustainable and that maybe you have to write off some of it, added Rajan. Pushing Greece and others beyond a certain point could create problems.
Austerity is not for all, the panellists suggested. The United States and the United Kingdom have no need for immediate fiscal austerity, said Orszag while Lagarde suggested that Portugal can afford to relax [austerity] a little and that Greece too had made a huge adjustment.
In a separate briefing to journalists in Tokyo, UK Chancellor George Osborne said that the UKs austerity measures were necessary to ensure economic stability. If you dont get on with structural reforms to your public finances, reducing welfare costs, reforming education, putting in place the infrastructure you need for a modern economy, then you are going to suffer, Osborne said.
Sadly too many Western countries seem to be ducking those challenges, we in Britain are determined not to.
Speaking ahead of todays meeting of the IMFs International Monetary and Financial Committee, he said: There is less of an immediate sense of crisis than there was for example at last years annual meetings but that there is a greater concern about what lurks around the corner.